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Canada and Indonesia relationship to strengthen with the last infrastructure project partnership

Indonesia is a dynamic country, influential regional power and a global player that offers Canada many opportunities for engagement. It has an emerging economy and is the world’s third-largest democracy.

Even before the establishment of formal diplomatic relations in 1952, Canada and Indonesia enjoyed positive relations. In 1948, diplomatic efforts by Canada’s Ambassador to the UN, General Andrew McNaughton, helped to resolve deadlocked negotiations between Indonesia and the Netherlands, its former colonial power, paving the way toward international recognition of Indonesia’s sovereignty in December 1949. Since then, Canada and Indonesia have maintained a strong partnership across many areas, including trade and investment, good governance, human rights, religious freedom, pluralism and poverty reduction, counter-terrorism and security capacity-building, and prevention of human smuggling and illegal migration.

At the multilateral level, Canada and Indonesia collaborate in the G20, APEC and the Association of Southeast Asian Nations (ASEAN) Regional Forum.

Since 1954, Canada has provided more than $2B in official development assistance to Indonesia and, in 2016-2017, Canada delivered $36M through all channels, helping to improve sustainable economic prosperity for the poor and to support Indonesia’s democratic-governance reform agenda.

The event was attended by about 60 attendees, including Canadian Ambassador to Indonesia H.E. Peter MacArthur, representatives from the Canadian Embassy in Indonesia, EDC, the ASEAN Secretariat, Canadian businesses, and local key players in the infrastructure sector in Indonesia.

The event featured presentations and a panel discussion on the challenges in Indonesia’s infrastructure landscape and opportunities for Canadian businesses. The following are some of the key takeaways:

Opportunities

Infrastructure development is one of the top priorities of the Indonesian Government, as outlined in the National Long-Term Development Plan(2005 – 2025) and the National Medium-Term Development Plan (2015 – 2019). Indonesia is prioritizing the development of transportation and energy sectors and has set the targets to build a railway network of 8,692km in 4 main islands, develop 1,000km of toll roads, build 15 new airports and 24 new seaports, generate 56GW of power, and reduce logistics costs from 23.6% to 19.2% of GDP.

As the largest economy in Southeast Asia, Indonesia faces major challenges in infrastructure development and is lagging behind the development of other ASEAN member-states, particularly in roads and seaports.

Geographical size – As an archipelagic country, Indonesia is made up of 17,508 islands with a vast population of more than 250 million people.

Growth disparity – Development discrepancies exist within the country, with Java, Sumatera, and Bali being manufacturing centres while natural resources are spread all over the country.

Domination of state-owned enterprises (SOEs) – Given the great presence of local SOEs in Indonesia, foreign companies find it difficult or are reluctant to participate or invest in projects in Indonesia.

Governance and regulatory constraints – Despite the government’s intention to speed up infrastructure development, businesses often complain about the lack of coordination among government bodies, inconsistent policies inconsistency, overlapping regulations, and the lack of promotion of Indonesia to international investors. This also highlights the budget and human resources constraints in the government.

Infrastructure financing – While the Indonesian Government has ambitious plans to accelerate infrastructure development which would require an investment of IDR 4.6 trillion, financing remains to be the major challenge. This highlights the need to deepen banking and credit markets to create a transparent, enabling environment for financing and investments.

Canada as a trust partner & investor of PPP infrastructure projects in Indonesia

Public-private partnership (PPP) has been identified as a viable approach for the government to invite the participation of the private sector in the financing and development of public projects. Other infrastructure financing alternatives include viability gap funding (VGF), non-state budget investment financing (PINA), availability payment (AP), Komodo Bond, asset-backed collective investment contract (KIK EBA), and Geothermal Fund.

During the panel discussion, speakers pointed out that PPP is at its early stage of development in Indonesia and called for the simplification of the PPP process to speed up the country’s development. Investors should also take a long-term view in assessing the financial sustainability of PPP projects, i.e.cost of the project and potential returns when the project is in its full operation.

At the same time, while the PPP structure may hold private sector accountable for public projects, the government and public service are still in control and ultimately responsible for the delivery of public projects and their long-term operations.

Canada is well-positioned as a partner for Indonesia in its infrastructure development given its expertise. For example, Canada adopts a sustainable and mutually-beneficial partnership-preferred approach which values collaboration with local partners and training of local talents.

Canadian businesses are also encouraged to consult the EDC as well as the Trade Commissioner Service under Global Affairs Canada to build connection and partnership with local partners in the markets. This aims to increase awareness of opportunities available in the region and encourage Canadian businesses to take risks and venture beyond their traditional markets.